Demand Still Shrinking

Kansas City-based consultant Bill Helming continues to warn producers against "unrealistically high and inflated expectations" on calf and stocker prices through the year 2000. He believes that cattle prices will remain disappointing in 1998 through 2000.Helming decries the belief by most producers that calf prices will hit $125-126/cwt. and fed-cattle prices to $80 during that period. Instead, Helming

Warren Kester | Aug 01, 1998

Kansas City-based consultant Bill Helming continues to warn producers against "unrealistically high and inflated expectations" on calf and stocker prices through the year 2000. He believes that cattle prices will remain disappointing in 1998 through 2000.

Helming decries the belief by most producers that calf prices will hit $125-126/cwt. and fed-cattle prices to $80 during that period. Instead, Helming projects $62-68/cwt. prices on fed cattle the next three years, averaging in the $60s/cwt. in 1999 and through 2000.

This will be tough for feeders who have lost $2.5 billion on the 25 million head sold last year, Helming notes. That's $100 a head including interest costs, and could be substantially higher the next six to 12 months, he warns.

Low Prices Ahead "We are establishing a new plateau for cattle prices, but during this cycle, the plateau will be at a lower, not higher, level," says Helming. This is in direct conflict and contrast to what producers, feeders and even ag bankers are thinking.

"Improved cattle feeding margins generally will come out of the cowman's hide over the next three years," Helming contends. "This will be a major disappointment for cow-calf producers."

Shrinking consumer demand is the big culprit. U.S. market share for beef slid 30% from 1976 through 1997, with pork consumption down 18% (see chart). Poultry showed an 83% boost.

More bad news: Beef's share likely will reach 26% by 2003, regardless of what we do short term, he says.

These factors have put the U.S. cattle industry on the defensive, triggering cow liquidation that started in 1996 and continuing through 2002, Helming believes. Cattle inventories could decline 5-10% through that period, aggravated by drought conditions mainly in the South and Southeast. He points out, however, that the sell-off won't cause an upward reaction in fed-cattle prices, as is usually the case in a declining cycle.

There are other factors affecting today's trends, Helming warns:

Average monthly fed steer and heifer slaughter weights were up 25-29 lbs. April through June 1998, compared to a year earlier, sparked by the industry's trend toward larger-framed cattle. "Remember, it's not inventory numbers that count," Helming warns. "It's pounds of beef produced and sold."

The beef export outlook looks "lackluster and disappointing," affected by the Southeast Asia and Japanese financial meltdown where a substantial portion of our foreign beef exports go.

Large competing meat supplies will continue to "substantially limit the realistic upside potential" for fed cattle and carcass prices. Adding volume will be accelerated beef cow liquidation by producers squeezed by drought conditions in Texas, Oklahoma and the Southeast.

Continuing low inflation and coming general price deflation could pressure commodity, oil and feed grain prices the next five to seven years. "This will likely impact the price portion of the cattle cycle and upside potential for cattle prices," Helming says.

What's The Solution? 1. Develop a true value-based production and marketing system that pays significant premiums and discounts based on consumer eating satisfaction scores.

2. Develop a price discovery system based on carcass cutout values with data available within seven days.

3. Scrap the USDA beef quality grading system and force packers, processors and others to be accountable with branded products. The result: new tender, tasty, convenient and easy-to-buy and prepare products.

Lastly, Helming urges replacing today's tax code with a single-rate, broad-based consumption tax. He believes it would have a direct and positive impact on the financial well-being of all U.S. cattle producers.